Baxter International Inc. (BAX) Earnings Call Transcript & Summary

Okay. Welcome to our next session. And this morning, we have management team with us from Baxter. I'll introduce them in a second. I'm Matt Taylor, the U.S. medical supplies and devices analyst here at Jefferies. And we're meant to have another 25-minute fireside chat with the team. So sitting here to my left is Jose Almeida, the CEO of Baxter; and then just to his left is Clare Trachtman, who heads up the IR function.

And so I guess, Joe, I wanted to just start a little bit high level. Maybe talk about a lot of the changes that are happening at Baxter. There's been some portfolio moves, some simplification, restructuring. A lot of things going on. So maybe talk about the goal of all those actions and give us some of the key highlights, and we can go from there.

Thank you, Matt. Good morning. We took a very deep look at where health care is going, primarily in medical devices and some of our businesses and decided to create a vision where the connected care space was going to be front and center for the company. So that defined our acquisition of Hillrom and the deeper look we took in the portfolio of the company in general. So as we decided to pursue Hillrom as an acquisition, we were going to open significant opportunities for the company to integrate our businesses in the hospitals, ACSs all the way to the home in a way that we didn't have before. So by doing that, we also took debt. And when we look at allocation of capital, we said, how do we now mitigate the debt and continue to invest in the business, and that was the portfolio management decisions that we made with BPS, which we currently are in process selling, and we announced a few weeks ago the sale for $4.25 billion which will help reduce the debt load. But also, we announced earlier in the year after 6 months of significant amount of portfolio analysis that our Renal Care business, our segment Renal Care business, is going to be spun off in this public traded company. It's a business that is quite different than the rest of Baxter's business, despite the fact it's a home business for the most part and clinic. It is not an acute business and also has a very different investment profile, ROIC is quite different than the rest of Baxter. And that separation allows the business to pursue its own capital allocation, which has to be done in a way to create technology that reduces cost of health care, at the same time, now enhancing profitability. And some decisions in terms of their own portfolio. independently of the rest of Baxter which will have a capital allocation more focused on creating innovation in the connected care space. So those decisions were made, and we followed that with the reorganization of the company that drove not only headcount reduction, but much more focus in 4 segments, 1 being Renal Care, which will be spun off, but 3 different segments that have their own return on invested capital. And we, as a company, have now the ability to invest differently in them to pursue growth above their WAMGR, and most importantly, innovation in the company. So also create innovative business, more agile but fully, fully accountable businesses that are fully vertical and globalized. So all these businesses now have global operations, including supply chain, quality, planning, go-to-market, upstream/downstream marketing, research and development. So we have segment presidents fully accountable for the business.

I think you addressed a lot of the questions in that question very thoroughly. So 1 follow-up I had was with Kidney Co. You mentioned as that spins, they can pursue some of the capital allocation and investment decisions differently maybe than under the Baxter at large. Could you talk a little bit about what that could be and how that could benefit the KidneyCo business and ultimately Baxter shareholders?

Sure. The business needs to look at its 3 specific segments, which are acute renal care, which is a really good growth business, depressed in the last 12 months still to COVID. That business grew significantly during COVID. We didn't expect to continue growth of 20%, 30%, 40% like we saw in some of the periods. But it's a great, well penetrated business in the ICU. They need more investment in terms of other types of filtration but also the connection of that device into predictive analytics for better treatment of acute renal disease. Second is our peritoneal dialysis, which will continue to benefit for continued penetration of the therapy, but also we need significant amount of research and development to come up with the next generation of cyclers. And eventually, a cycle within a water treatment system that can be done at home without having to produce significant amount of volume of products delivered to people's houses every single month. As you know, the cost of distribution of the business is pretty high. It's a great business, but it needs to innovate to reduce the cost overall health care. And then you have hemodialysis business that is more commoditized, and some decisions need to be made in terms of where you're going to be on now, in what business you're going to continue to be in, what parts of the world you're going to continue to be in. So if you look at our research and development profile of this business, it has to be a very different and much more focused on areas with high growth. And I think as part of Baxter, they would not be able to get the amount of investment that they need. And some of the decisions in terms of where to participate as well. So the value for the shareholders is a pure play, kidney care company that is able to compete on a global area, in all areas of kidney, of dialysis and kidney care, but with specific objectives in where to participate and where to invest in technology, better focus that Baxter will ever give them.

Maybe a follow-up to that would be, over time, Baxter's had success with this because you were a part of that. Maybe talk about how these changes that you're making today remind you of some of the successful actions that you had with Baxalta and other spins in the past.

So when Baxalta was spun off of Baxter, it was about 6 months before I became CEO. When I came to Baxter, we had a very different business, a much lower profitability, a much higher SG&A than we have today, and a business that had a very low cash flow. And the transformation of Baxter is a 3-step transformation. We started first 1 in '16, had another 1 in mid-'18 and 1 now with the portfolio transformation with the acquisition of Hillrom. Reminds me tremendously how we focus the company and remove some of the barriers that we had in making this businesses better. This business that I got when I became CEO of Baxter were very much underinvested and somehow neglected because you had such a high profitability business mix with that. So the conversations I'm sure before Baxter is what it is today was all about bioscience. That drove the business, that drove the profitability. When they left, we were now accountable to transform a company and we did know from an 8%, 9% operating income, we hope this year to exit the year with about 17%, 18% operating income after COVID and all the supply chain issues. But it's a huge transformation. So I expect Chris Toth, who will become CEO of the company, to have the same challenges in the beginning and be able to transform the company the way we did. Transform its manufacturing footprint, transform the innovation and focus more, decide what portfolio to invest and what not to invest, what to stay and what to exit. So that is going to be more clear when we have the market we have Market Day in probably early 2024.

And maybe we could go back to some of the benefits to RemainCo shareholders. You talked about the ability after reducing the debt, to do more investment in Connected Care was a key area that you highlighted. Could you review the state of Baxter's Connected Care business today and how you hope that evolves over time with more internal and external investment?

There's not a single device that we have today that is not integrated both to the EMR products from Hillrom. The majority of them, if they are in acute care, they are or they will be integrated into the EMR chosen by the hospital. From pumps, even our current pump, our SIGMA SPECTRUM, is fully 2-way integrated into the EMR. We have over 100, close to 110 installations today, which is bidirectional. Our monitors as well, vis-a-vis our installation HCA of monitors which now transmit information into the EMR and carry through with the patient throughout their journey into the hospital, as well as our beds. So we're launching this year on a pilot [ Connectis ]. [ Connectis ] is our solution to bring all Baxter products into 1 platform and will be able to connect. So you can display pump information in the monitor or the bed information in the monitor, and you can get that information to the provider, to the nurse, nursing station and so forth. So we have some very exciting new technology that we're going to be launching in the next 2 to 3 years that will allow us to do even more with the data. Because 1 of the things is to collect the data, and we do that. The other 1 is to transmit the data. The third 1 is to make sense of the data, and that is the part that I'm more excited about. It is how to make sense of the data, providing sites to reduce the overburden of alarms and desks and duties that the current nursing staff has in most of the ICUs and step down units. So we have a new monitor coming down in '25, we have new variations of software to manage safety for infusion in '24. So great, great progress. But also, we're now in a phase with a partner. We'll be trying different products, not all of them FDA approval needed, to go into enhancing the experience of connecting the dots for the provider. So we have a program going on right now, we have this external partner that's much more agile than we are in launching those products. So we're making some good progress, and we'll keep you informed as we go along.

Very good. Going back to some of your comments on the challenges that your businesses have faced through COVID with tough COVID comps, but also issues like staffing and census. How could we see some of those things normalize going forward? And what are kind of the key things that you're looking for currently and in the future to help us understand whether they could improve?

Well, we see the trends more normal today across the board from admissions, surgery and parts of the acute and semi-acute ACSs and hospitals. Baxter has -- each business of Baxter has different levers and drivers. But if you think about the Baxter legacy business ex Hillrom, it's all about beds. If you have beds in the hospitals which are occupied, our products are used. Infusion sets, pumps, nutrition, antibiotics drugs. And so what we see is the acuity level perhaps reducing a little bit. But the volume of patients is still pretty good. And not decreasing, but not increasing rapidly. I think from the beginning of the year when there was a significant increase in volume of patients that we saw, I think it's more normalized now, and we haven't seen many changes to that trend. So that for us is a big deal because that part of our business is all about consumption. And the consumption is by bed, by patient. This is how it goes. It's not about the length of stay. It's also important. It's about the criticality of the patient acuity, but also how full the hospitals are as you move forward. And when we see that as a neutral to slight positive trend. When you move into now our HST business, that business is the Hillrom pharma business. That is driven by few factors, one being capital procurement. In that, we saw a reduction in the first quarter, as we noted -- as we noted in our remarks and our discussions in the first quarter. We see with the launch of our new bed Progressa+ and Centrella with continued rotational movement, those 2 products are doing well. And so we see -- when I say, normalization of that business, we see that, that business continues to grow less than last year. But the continuation of the year is when we see that progressing and improving. But we've been very successful quoting our new products as we see them launch the [indiscernible].

It's great to hear about the more normalized and good current trends, and it's hard to predict the future, especially after a couple of years of very highly unpredictable conditions. But what do you think these trends hold for the future as you look into 2024 and 2025?

That's a really tough question because a lot of that has to do with inflation, has to do with adjustment of interest rate when it comes to capital. But also how the nursing and the staff in the hospice will normalize because I think there is -- if it depends upon the markets, you still see shortages. But they are a little bit more subdued today than they were last year you have less inflation on the wages of nurses. So if you see a trend into '24 and '25 will be more automation. And reliance on insights to make the jobs that are on the floor of a hospital today easier to manage, the ratio nurse to patients or patients to nurses to be a big one. So sitting here, there's nothing that tell us that we're going to have negative trends into the future '24 and '25. And if Baxter plays its hands well in terms of connected care and the approval of our products that currently with the FDA, it looks like that the future is not going to go backwards, like we saw in 2020, 2021, 2022.

And following up on inflation, maybe you could talk about how some of that normalization could benefit margins and some of the other margin opportunities that you have that you talked about, like pricing, for example, and simplification and restructuring.

So I think thinking about 4 levers that we have in front of us for margin, the first 1 is mix, making sure that we're taking advantage of the new products, launching them well. We've proven that recently with our pharmaceutical business. We launched new molecules. We did very well and then made a difference in profit -- in our margin profile for that business, which has been under significant pressure on generics and generic injectables. So it's about innovation. So launch the products when you plan, make sure you take advantage of the technology and the price that the technology deserves to be launched at. Second is making sure that our cost reduction programs manufacturing and $300 million a year gets executed and gets planned way ahead and go well. And take advantage of the trends today, which start to become very positive in terms of transportation cost and cost of fuel and cost of containers, on ocean containers are becoming much more affordable and available. The third 1 is to ensure that our G&A is ever reducing. So become -- we just we have shared services offices in Malaysia, in Poland, in Costa Rica, in India that we maximize the use of our G&A resources in those low-cost countries. So some of the margin improvement will go to the bottom line, and some of that will go into innovation and research and development. So it's mix, cost reductions, innovation, launch the products right. And don't forget, there's still some room in G&A. Baxter is a health care company with an industrial profile of manufacturing. So we've got to make sure that we understand that every point of G&A, of expenses count. And we go aggressively against that. So we can use that to benefit shareholders in the EPS line. But also we don't forget to invest in connected care and a business that we acquired. Because the reason we acquired Hillrom was to change the trajectory of the company base what we saw in the marketplace. So it would do no service to Baxter not to invest and go cut R&D. So we have 4%. We should be a little higher than that to be able to take advantage of both end programs that are sitting there waiting for funding.

You talked about the pump as a near-term opportunity and some of the other new products like the molecules in pharma, and I guess the patient monitoring in '25 was another 1 that you mentioned...

And the beds that we just launched.

The beds, right. So maybe you could talk about the pump and what that could mean for the business, because that's a pretty chunky new product and the start of a new platform.

Yes. So our current pump continues to take market share. We're happy with that, but not satisfied. We need our new pump to be approved by the FDA. Recent conversations, they are very focused in working on that. We had reassurances from the FDA. They're working through a very large package we sent to them, and that is their priority. So we're happy to hear that. Hopefully, we'll hear from them soon. But there's not a promise because I don't manage any of the resources of the FDA. They need to have control if they approve or deny a process. So how does that program help us? It creates a -- with a syringe pump which has been very successful at the moment, the pairing there with a new pump creates 1 platform of integration in a hospital. We currently use for our SIGMA SPECTRUM, a third-party gateway to integrate the 2 way between the pump and the EMR. Our new pump uses a different gateway, it's proprietary to Baxter, and that gateway actually is where we're going to plug a lot of the devices from Baxter in the future. That gateway manages the traffic of a hospital with 5,000, 10,000 pumps, how they get programmed into drug libraries, and that converses with the EMR. So the LVP NOVUM, which is with the FDA at the moment, will pair very well with our current syringe pump and open a significant amount of market share opportunity for game because we can go and take competitive market share in its totality. Today, we're taking market share on the syringe pump from current providers in the marketplace that usually used to go with us because we didn't have that pump in accounts which we have pumps and they came in with a syringe pump. So we're replacing those pumps with Baxter new syringe pump. But to be a complete opportunity, you've got to do both at the same time. And I think that will open a significant amount of market share to be gained because our platform is brand new. It's not an aging platform. Being redesigned and software revalidated.

In addition -- that's a great overview. In addition to the other products that you mentioned, what are some that we didn't talk about that you think investors should focus on in the next 1 to 2 years?

Well, let's look at Progressa+. It's a great platform. But don't forget Centrella with a continuous lateral rotation, which is a great product to go into a low ICU acuity because it does some of the things that all would do and competes very well with a competitor product just launched. Progressa+ is getting a great acceptance in the marketplace. We're seeing good momentum in terms of quoting new opportunities. So that's something to also watch our ability to launch new molecules, 10 molecules a year with some ability to offset and gain potentially a slight margin in our injectable portfolio. Those we just -- we had norepinephrine launched last year. It was a real success. Peak time to peak sales is very quick in those products, and it should last 3 to 4 years. But you have to have at least 10 product launches a year to be able to offset the future. I'll also watch -- I know we have some really interesting products and talk more probably early next year about some products in the vision diagnostic as well as cardiology that we have coming up. We're excited about it. So right now for us is a couple of launches in our medication delivery business, 1 of them being a revision of our very, very, very successful Mini-Bag Plus. I'm excited about that. The extension -- line extension, we already have great market share that affirms Baxter and #1 by far in it the pharmacy of the hospital with rapid compounding of drugs. So pump -- oh, just forgetting 1. We just launched EXACTAMIX Flow, the #1 most sophisticated compounding for nutrition that just got launched and is doing very well. So EXACTAMIX Flow hopefully getting the NOVUM LVP pump which would be very good for Baxter. A few molecules -- PerClot, by the way, we just got PerClot approved, and we're launching that and that the product will be a phenomenal success as we can see today is an alternative for passive. It's Baxter's first passive hemostat, and it's going to compete well against a couple of well-established competitors in the marketplace. So our team is really excited about that. And the beds that we just spoke about. So there's a lot going on, a lot of them in connected care as well. Thank you.

Great. Thanks so much. Thanks for your time, and thanks, everybody, for your interest in Baxter.

Thank you.